Foreign Trade of Turkey

Nigyar Masumova, PhD in Economics, Associate Professor of the Department of World Economy, MGIMO-University

Foreign Trade Policy of Turkey: from Secularization to Liberalization

Abstract This article considers the evolution of Turkey’s foreign trade policy since 1980-s, afterwards the import substitution policy failed. The analysis focuses on the role of Turkey as a crucial element of regional trade, and perhaps of the global trade. The country reinforces its participation in global value chains and focuses on increasing country’s share in world trade. The paper examines the features of geographical and commodity structure of the Turkish international trade and its dynamics.

Keywords: Turkey, liberalization, foreign trade, foreign trade policy.

Introduction Turkey is among rapidly developing countries with very high rates of economic growth. This is despite the fact that OECD considers Turkey to have a developed economy. Furthermore, Turkey is one of the few Islamic countries which managed to become a global and regional leader. Furthermore, it is closely linked to the European market and is a candidate for accession to the EU. It is worth mentioning that since the dissolution of the Ottoman Empire in 1923 Turkey announced the process of secularization of all spheres such as politics, science and economics. Moreover the Ottoman Caliphate was abolished a year later in 1924. The country has passed through complex and painful reforms. Hence the social and economic model of Turkey is unique and it was undergoing the transformation throughout the 20th century, i.e. it was developing, taking into account its own traditions and history.

It was just at the beginning of 1980 (before the September 1980 military coup), when the way for the economic liberalization policies was paved after a long transformation of Turkish socio economic model during 1923-1980. In the of book Michael Porter [12] it is brought to the fore the analysis of the competitiveness of different countries based on a wide range of fields including foreign trade strategy, transformation of industrial policy, and the companies which play a huge role for improving the competitiveness of the economy rather than government. The import substitution model, which had already become exhausted, was reflected in export- oriented manufacturing industries. The government implemented an integral export support system. Turkey aimed to develop those branches of industry, which were targeted at manufactured goods export. The priority for industrial policy of the country became the process of forming competitive advantages of Turkish manufacturers on the external market. As a result, the country's total external trade has grown, its geography has expanded, and there has been a qualitative change in its structure: the share of agriculture has decreased, while the share of manufactures has increased (from 23% in 1980 to 97% in 2018). Despite the fact that GDP of the country had been primarily agricultural before the beginning of the reforms, the share of industry started prevailing since 1981 (see figure 1). Therefore, Turkey has evolved from an underdeveloped agricultural country to an industrial agrarian country and subsequently to an industrialized one.

Figure 1

Structure of GDP of Turkey (%)

40 Agriculture 30 Industry

20 Services

0 1960 1970 1980 1990 2000 2010 2017 2018*

* Provisional. Source: The World Bank Data. URL: www.worldbank.org (16.06.2019)

As a consequence, Turkey has become one of the most powerful and dynamically developing countries of the world, in addition, it has the necessary supply capacity for the continuing economic growth from this point forward. Social and economic indicators of the country are improving, while the well-being of the population is increasing as well. Religion is playing an increasingly essential role in the economic life of Turkey. As a result of complicated relations between the secular government and growing political Islamic movements in 2002 the ruling party (Justice and Development Party – Adalet ve Kalkinma Partisi (AKP)), chaired by current President Recep Tayyip Erdogan, won the parliamentary elections. New economic policies, carried out by the party, have considerably contributed to the intense development of the country's economy. Thus, since 2010-2018 Turkey achieved an average GDP growth rate of 7% to prove it. Nonetheless, political and economic situation both within and outside the country was unfavorable, Turkey managed to achieve high growth rates, and according to OECD the current provisions will be maintained in 2019.

Export promotion instruments

Undoubtedly it was necessary to establish an economic institution, capable of providing low-cost financial resources for Turkish exporters during 1980s liberal reforms. Therefore, Export Credit Bank of Turkey (Türk Eximbank) was established in 1987, which turned out to be a tool for encouraging foreign trade, specifically to increase the share of the high-tech products in manufactured exports, to promote traditional and non-traditional Turkish goods on the world market.

As Türk Eximbank is a state-owned commercial bank, and it is not served for profit-making goals. The Bank uses such instruments as granting soft loans, implementing guarantee and insurance programmes. Thus, the financial institution fully supports export-oriented Turkish enterprises.

It was essential to update the policy and standards of bank activities as the economy of Turkey was developing. In 2013 the Act of the Cabinet of Turkey #2013/4286 was adopted. The Act indicates the goals, objectives and instruments of Türk Eximbank corresponding to modern demands. The relevance of the bill is likewise very important nowadays. The Act is connected to wide application of protectionist measures in the international trade. Moreover, the growth of exports ensures a steady flow of foreign currency to Turkey.

Foreign trade policy of Turkey as a part of foreign economic policy is aimed at the growth of foreign trade volume, the increase of the country’s proportion on the global market, the extension of the volume of high value added goods, and well-balanced foreign trade relations with partners. In addition, Turkey’s foreign trade policy helps to develop the sectors, which meet the needs of the country in the terms of imported goods, and take protective measures against unfair competition. Tax relief is given to manufacturing exporters, and comfortable conditions are provided for business development in the free economic zones. Besides, as a result of Westernization, Turkey joined GATT in 1951 and later WTO in 1995. In January 1996 the Custom Union Agreement on manufactured goods trade with the EU entered into force. Turkey is a member of such economic organizations as the OECD, UNCTAD, the Black Sea Economic Cooperation (BSEC), the World Trade Organization, ECO, G-20 and etc. The state currently has free trade agreements with the European countries outside the EU, as well as with the countries in the Middle East.

Besides export quotas, as an indicator of the significance of export for the country's economy, have started increasing rapidly as a result of the liberalization of foreign trade. By counting export quotas from 1960 to 2018 it can be concluded, that Turkey's economy has become more open. This figure has increased from 2% to 19%, thereby it approached the indicators of many developed countries. Thus, an incentive to the significantly increase of the volume and quality of Turkish export has become the signing of an agreement, establishing the Custom Union on industrial goods with the EU states. Moreover, Turkey adopted high European standards of quality of exported Turkish goods to Europe. Due to big markets of both EU and Turkey foreign trade between them has been a key component of strategic partnership.

Table № 1 Export quotas of Turkey (%) (1960-2018)

Year 1960 1970 1980 1985 1990 1995 2000 2005 2010 2015 2016 2017 2018* GDP 13,995 17,087 68,789 67,235 150,676 169,486 272,979 501,416 771,902 859,797 863,722 851,102 865,214 (mln $)

Exports 321 588 2,910 7,958 12,959 21,637 27,775 73,476 113,883 143,839 142,530 156,994 168,023

Export quotas 2.3 3.4 4.2 11.8 8.6 12.8 10.2 14.7 14.8 16.7 16.5 18.4 19.4 (%) *Provisional Calculation based on sources: 1) World databank. The World Bank. URL: http://databank.worldbank.org/ (24.07.2018), 2) Turkstat. URL: www.turkstat.gov.tr (8.06.2019).

By Stolper-Samuelson theorem implies that the exports is more important for the developing countries. [13]Since liberalization foreign trade of Turkey with the developed countries was based on the import of capital intensive or skilled labor intensive goods from European countries and cheap labor intensive goods to European countries. But Turkey should increase its export of high technological intensive goods. As a consequence of the reforms of 1980s we see the increase of the exports of motor vehicles, meanwhile the share of apparel, textile and food in Turkey’s export to developed countries has become significant. Five years after the beginning of the liberal reforms, the economic structure of Turkey and its export structure have achieved a qualitative improvement, specifically, the share of agriculture in GDP has decreased, the share of manufacturing industry has increased, and the share of manufactured goods for export has risen either (from 38% to 94%). An increasing portion of growth of the industrial export took place in areas such as textiles and clothes, food and beverage production, steel industry, car production, machinery and equipment production. Moreover, in 2018 the percentage of high-tech manufacturing of Turkey's total exports was 4%, medium- technology – 61%, low-tech – 35%.

Table № 2 Trade structure of foreign trade of Turkey (mln $)

Exports Imports

1980 1990 2000 2010 2017 2018 1980 1990 2000 2010 2017 2018 Total 2.9 13.0 27.8 113.9 157.0 168.0 7.9 22.3 54.5 185.5 233.8 223.0

Agricultural goods 1.6 2.0 1.7 5.1 5.3 5.6 0.2 1.5 2.1 6.5 9.0 9.3 Minerals 0.2 0.3 0.4 2.7 3.5 3.4 4.5 6.6 7.1 25.9 26.1 29.0 Industrial goods 1.1 10.5 25.5 105.5 147.1 157.8 3.2 14.2 44.2 145.4 190.8 176.0 Источник: Dış Ticaret İstatistikleri. Türkiye İstatistik Kurumu. URL: http://www.tuik.gov.tr/ (16.06.2019).

Therefore, the changes have occurred on the import side as well. First of all, the share of fuel minerals has decreased from 49% in 1980 to 16% in 2017, secondly, the share of machinery and equipment has increased from 16% to 31%. However, the changes happened only in the figures of the imports, mentioned above. A large number of mineral imports take place due to lack of energy resources (oil and gas), and consequently Turkey is heavily dependent on the import of oil and gas. As u result the state has a chronically negative balance on the trade account, and the foreign trade deficit reached almost $55 billion in 2018, and the shortage becomes one of the reasons of Turkey’s external vulnerability. Since liberalization of 1980s the difference between the exports and the imports is rapidly growing.

In this context, it is important to place emphasis on the percentage of high-tech manufacturing of Turkey's total imports, estimated almost 16%, medium-technology – 71%, low-tech – 13% in 2018.

During the financial crisis in 2008-2009 Turkey's foreign trade volume has decreased (export – by 23%, import – by 30%), and only in 2011 Turkey managed to achieve pre-crisis rates. However, global economic slowdown, which started in 2014, affected both the export and the import and failed to improve by the late 2017. Nevertheless, export figures and trade in general have increased during 2018, despite a slight decline of the imports. Figure 2

Foreign Trade of Turkey (mln USA $) 500

400

300

200

100

0 1980 1990 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -100

-200 Exports Imports Trade Balance Volume of Trade

* Provisional. Source: Türkiye İstatistik Kurumu. URL: www.turkstat.gov.tr (16.06.2019).

Today Turkey is 31 in the list of global export and it is 20 in the list of the global import, or Turkey accounts for 0.89% of world exports and 1.22% of world imports. Meanwhile, in 2018 share of world GDP of Turkey accounted for 1%. In addition, Turkey is one of the largest exporters of agri-industrial products, textile and leather goods, automobiles and equipment, electronics and some natural resources (especially building materials), bohr and zinc.

Geographic distribution of foreign trade has not changed over the decades, and it is focused generally on the EU states. EU-countries estimate 1/3 of all Turkey’s foreign trade turnover (43% of exports, and 36% of imports). Moreover, the proportion of Arab countries is increasing (23% of exports, and 9% of imports). The main foreign trade partners of Turkey are considered to be Russia (2% of exports, and 9.9% of imports), Germany (9.6% of exports, and 9.1% of imports), Italy (5.7% of exports, and 4.6% of imports) and The USA (5.5% of exports, and 4.9% of imports).

Figure 3

Exports of Turkey by destination (%) 12

0 Germany Great Italy Iraq The United Spain France Netherlands Belgium Israel Romania Russia Britain States

2010 2018

Figure 4

Imports of Turkey by destination (%)

0 Russia China Germany The United Italy India Great Britain France Iran Korea, Rep. States

2010 2018

Source: Dış Ticaret İstatistikleri. Türkiye İstatistik Kurumu. URL: http://www.tuik.gov.tr/ (16.06.2019).

Investment zones

Turkey has become one of the attractive destinations for foreign investors due to its flexible law and huge population and market size. Turkey was the largest recipient in West Asia, with inflows rising by 13% to 13 bln $, despite slower than usual economic growth (2,6% GDP) and uncertainty surrounding the Turkish lira.1 Due to François Perroux’s idea of economic Growth Poles2, economic zones become a driver of the national economy. Growth poles concentrate the investment and the entire infrastructure for business in order to accumulate development of the certain industries and the regions of the country. Therefore there are a lot of special investment zones in Turkey There are three types of zones as 1) technology development zones (technoparks), 2) organized industrial zones, 3) free zones. The main purpose of technoparks is to support R&D activities and attract investments in high-technology fields, as well. Organized Industrial Zones allow companies to work in convenient conditions which include developed infrastructure and social facilities. Free zones are created to boost the exports and to attract investments in different regions of Turkey. Thus, 330 investment zones are now active and companies intensively use them.

Russia and Turkey trade relations

Russia continues to be one the main trade partners of Turkey. An analysis of trade between Russia and Turkey singles out a steady increase in volumes, recovered after a certain decrease during the period of the 2008–2009 crises (see the table below). Turkey runs a trade deficit, i.e. its imports from Russia exceed its exports, mainly due to Turkey’s purchases of Russian energy sources. In 2016, Russia accounted for 1.2% (2.5% in 2015) for Turkey’s exports and for 7.6% (almost 10% in 2015) of Turkey’s total imports, in other words, for almost 5% (7% in 2015) of the country’s foreign trade, i.e. 16.9 USD billion and this figure was the lowest for the decade. Turkey, meanwhile, accounted for 5.5% (6% in 2015) of Russia’s exports and for 1.3% (3% in 2015) of Russia’s imports in 2015, i.e. for almost 4% of the country’s trade turnover.3

1 World Investment Report 2019. Special Economic Zones. 2 Francois Perroux. A New Concept of Development: Basic Tenets. – 2015, P.220. 3 Masumova N. Perseptions, Summer 2018, Volume XXIII, Number 2, pp.33-50. In terms of the product breakdown, Russia’s exports to Turkey dominate by oil, oil products, natural gas, coal, various metals and metal products. Thus, together these countries represent more than 70% of the total exports. In the interim, Russia’s imports from Turkey include textiles, food, machinery and equipment and household appliances. Nevertheless after the introduction in November 2015 of temporary restrictions on Turkish imports, which mostly affected agricultural products, 15% of Turkish exports to Russia ended up under sanctions according to preliminary estimates. Clearly the trade restrictions affected very sensitive Turkish exports. Today most of the sanctions imposed on Ankara have been lifted. However, the trade volume between two countries has been recovering very slowly notwithstanding the fact that the tensions between countries have been eased. The leaders of both Russia and Turkey have announced to attain the goal of 100 billion USD in foreign trade. 4 The achievement of the objective will be possible when joint mega investment projects start.5

Table № 3

Bilateral trade between Russia and Turkey Years 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 USD 21.0 28.2 37.9 22.6 26.2 30.0 33.3 32.0 31.2 24.0 16.9 22.2 25.4 billion Source: TÜİK http://www.turkstat.gov.tr/

The analysis of the export-import traffic by mode of transport once again highlights the fact that Turkey is a maritime nation: around 60% of the export and the import are accounted for by maritime transport. This figure has increased by almost 10% over the last 9 years (since 2010). The government managed to solve the problem of an inefficient and ineffective port system due to the privatization, modernization and construction of port infrastructure. Today there are 172 ports, located in the country, and four of them constitute among the largest world container distributing ports, located in Khaidarpasha, Ambarly, Izmir and Mersin.

Table № 4 The volume Exports-Imports by type transport (в %)

Exports Imports Type of transport 2000 2010 2017 2018 2000 2010 2017 2018 Maritime 47.1 50.7 58.2 62.8 50.6 53.2 58.6 59.6 Train 0.3 0.9 0.4 0.4 0.4 1.3 0.5 0.6 Road 43.3 40.3 29.2 27.8 33.6 22.9 16.2 15.9 Air 8.4 6.7 10.8 8.2 10.8 8.2 14.7 12.8 Others 0.9 1.3 1.4 0.8 4.6 14.5 10.2 11.2 Source: Türkiye İstatistik Kurumu. URL: www.turkstat.gov.tr (10.06.2019).

To sum up, according to the analysis of the role of Turkey and its place in the world trade in the post-reform period, we can infer that the national external trade stimulus policies enabled it to take rather strong positions in the world markets of goods. The variety of instruments, being used to achieve these goals, enables us to identify certain achievements in the external trade policy. The rate of the competitiveness of Turkish production has increased. In the interim, there is a significant problem – the proportion of goods with high added value is low, which indicates the weakness of Turkish industrial products. Therefore, the country must continue the policy of switching from labor-intensive industries to knowledge-intensive industries in the exports.

4 Daily Sabah.URL. https://www.dailysabah.com/economy/2017/08/28/russian-envoy-anticipates-100-billion-trade- with-turkey 5 Masumova N. Perseptions, Summer 2018, Volume XXIII, Number 2, pp.33-50. Turkey’s heavy dependence on the energy imports will hardly be minimized; consequently, the country accentuates the need of diversifying the routes of energy commodities.

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